From the perspective of the seller of a company (or business), the section of the contract concerning the limitation of its liability should not be missing. Moreover, it must be sufficiently well drafted to ensure that liability is limited both in time and in value. In this respect, several concepts are regularly used in SPAs: de minimis amount, tipping/spilling liability basket, maximum liability cap, liability period, limitations given by the time of notification to the seller of an event which may give rise to liability under the contract (in fact, further conventional limitation periods – in Romanian “termene convenționale de decădere”). In this article, we will briefly address each of these concepts.
De minimis amount
An example of the de minimis amount could be this: "The Seller shall not be liable for a claim unless: [ ] the Seller's liability in respect of that claim (together with any related claim) exceeds the amount of [●] EUR."
The purpose of introducing such a clause is to set a minimum value that the buyer's claims under the sales contract must reach for the seller to be liable to pay damages. The effect is that the seller will only be held liable for defects in the assets sold or breaches of representations and warranties which give rise to damage which the parties consider to be sufficiently substantial, while the seller will not be held liable for minor damages.
Cumulative minimum values - tipping / spilling liability basket
The minimum value clause can be combined with a minimum cumulative values clause i.e. liability basket. An example of such a clause could be this: "The Seller shall not be liable for a claim in respect of its warranty obligation unless: [1] the Seller's liability in respect of that claim (together with any related claim) exceeds [●] EUR [and] [2] the amount of the Seller's liability in respect of such claim, either individually or when aggregated with the Seller's liability for all other claims exceeds [●] EUR, in which case the Seller shall be liable for the whole amount and not just for the excess."
Our example above considers a tipping basket, which means that once the thresholds have been reached, the seller will be liable for the full amount demanded by the buyer. By contrast, a spilling basket refers to the fact that, once the value thresholds have been reached, only the amount of the claim exceeding the threshold will be indemnified by the seller.
In practice, if the parties agree to a de minimis plus basket seller liability limitation mechanism, a tipping basket will usually be adopted, rather than a spilling basket, as the latter represents an even more aggressive limitation of the seller's liability - which buyers seem to find difficult to accept.
Liability cap
The contract for the sale of a company (shares/stock or goodwill) may provide for a maximum total value cap for the seller's liability. Such a liability cap is an extremely useful tool for the seller to manage the risk arising from the signing of the sale contract, as the maximum limit of his/her/its liability under it is known at the time the contract is concluded.
Conventional liability period
According to Art. 2517 of the Romanian Civil Code, the general limitation period (applicable also to claims that could arise from a SPA) is 3 years. Art. 2515 of the Civil Code allows for the parties to agree on contractual limitation periods, if they observe certain limits laid down by law.[1]
In the context of an SPA, the seller will want to set specific limitation periods shorter than the statutory period to limit the time up to which the buyer can make claims based on the sales contract.
Limitations created by the time of notification to the seller of an event which may give rise to liability under the contract – further conventional limitation periods (Romanian, “termene de decădere convenționale”)
The Romanian Civil Code provides in Art. 2545 the possibility for the parties to establish by their own will further limitation periods applicable to the legal relationship between them.[2] These limitations have a different legal regime than the concept of “limitation period” and are a different legal concept under Romanian law.
Typically, SPAs include clauses providing for the parties' agreed procedure for handling claims that the buyer may make against the seller for damages under the warranty for defects, but also under the contract for breach of the seller's representations and warranties. These clauses may work to the advantage of the seller if they set agreed limitation periods after which the buyer will no longer be able to exercise his/her/its right to claim under the contract.
For clarity, this is a simple example of such a contractual mechanism for handling the buyer's claims: "The Buyer shall notify Seller of the occurrence of circumstances relating to a Breach in the form of a substantiated notice (a "Notice") which shall list in detail the facts underlying the Notice, including (i) the basis of the claim (ii) the estimated amount of the loss and (iii) any other facts and circumstances relevant to the claim) ("Claim") within [●] business days of the date on which the Buyer became aware (or the date on which the Buyer ought reasonably to have become aware) of the occurrence of the circumstances relating to a breach of the representations and warranties."
The time limit agreed by the parties for sending the Notice therefore operates as a conventional limitation period (Romanian, “termen de decădere convențional”), failure to comply with which effectively renders the buyer unable to enforce his/her/its claims.
[1] Art. 2.515 Civil Code: (1) The statute of limitations is regulated by law. (2) Any clause by which either directly or indirectly an action would be declared not time-barred, even though, according to the law, it is time-barred, or conversely, an action declared by law not time-barred would be considered time-barred, is prohibited. (3) However, within the limits and under the conditions laid down by law, parties who have full capacity to exercise their rights may, by express agreement, alter the duration of limitation periods or change the course of the limitation period by fixing the commencement of the limitation period or by changing the legal grounds for suspending or interrupting it, as the case may be. (4) Limitation periods may be shortened or extended by express agreement of the parties, but the new limitation period shall not be less than one year nor more than 10 years, except that limitation periods of 10 years or more may be extended up to 20 years. (5) The provisions of paragraph (3) and (4) shall not apply to rights of action which are not available to the parties or to actions arising from contracts of adhesion, insurance and those subject to consumer protection law. (6) Any agreement or clause contrary to the provisions of this Article shall be null and void. [2] Art. 2.545 Civil Code: (1) By law or by the will of the parties, time limits for the exercise of a right or the performance of unilateral acts may be established. (2) Failure to exercise a subjective right within the established time limit entails its loss, and in the case of unilateral acts, the prevention, under the law, of their performance.